Good day, and welcome to ATI Announces Fourth Quarter 2021 Results Conference Call. All participants will be in a listen-only mode. . After today’s presentation, there will be an opportunity to ask questions. . Please note this event is being recorded. I would now like to turn the conference over to Mr. Scott Minder, Vice President, Treasurer and Investor Relations. Please go ahead, sir.

Thank you. Good morning, and welcome to ATI's fourth quarter 2021 earnings call. Today's discussion is being broadcast on our Web site. Participating in today's call are Bob Wetherbee, Board Chair, President and CEO; and Don Newman, Executive Vice President and CFO. Bob and Don will focus on our fourth quarter and full year highlights and key messages, but may refer to certain slides within their remarks. These slides are available on our Web site. They provide additional color and details on our results and outlook. After our prepared remarks, we'll open the line for questions. As a reminder, all forward-looking statements are subject to various assumptions and caveats. These are noted in the earnings release and in the slide presentation. Now, I'll turn the call over to Bob.

Thanks, Scott. Good morning, and thanks for joining us. Our Q4 performance exceeded expectations. We're excited to share what 2022 will bring. No doubt 2021 was a challenging and rewarding year all rolled into one. By the global pandemic's ebbs and flows continued to impact our markets, we accomplished a lot. Performance accelerated across the year. We exited 2021 on a high note, earning our highest quarterly revenues and margins of the year in the fourth quarter. This is largely due to the solid foundation our team's laid in 2020 and early 2021. On an adjusted basis, we earned $0.25 per share, building on our return to profitability in the third quarter, and well ahead of expectations. For the full year, 2021 EBITDA margins were 10.4%, only 30 basis points below full year 2019. And that's despite 32% lower revenues. It's a strong statement of what we've accomplished, transforming our business to emerge stronger from the downturn. The team executed for our customers at the highest level while maintaining lean cost structures. This gives us confidence that continued strong financial performance is ahead. Don will share more details about our financial performance in a few minutes, but I wanted to give you the great news upfront. Let's start with the progress we made on our strategic initiatives in the quarter. First, we've been on a glide path to fully fund our defined benefit pension obligations. This will ultimately eliminate annual cash contributions and expenses. Our pace of progress significantly accelerated in 2021. We ended the year at an 84% funded status, up from 75% at year-end 2020. We took further action to reduce planned participation through another third party annuitization. We're working from every angle to eliminate this financial obligation. The end of our pension saga is near. Next, we've…

Thanks, Bob. I'll echo Bob sentiments on our strong finish to 2021. Our efforts over the past two years are paying off, and we're seizing market momentum as we accelerate into 2022. You can see it in our earnings. You can see it in our balance sheet. And you'll see it in our 2022 guidance. It's clear that we are executing. Before we look ahead, let's talk about what's gotten us to this point, starting with our fourth quarter results. Revenues were $765 million, up 6% sequentially and 16% year-over-year. Earnings increased even more rapidly, thanks to mix enrichment and cost structure improvements. We generated adjusted EBITDA of $95 million, up nearly 20% versus Q3 and up about 300% year-over-year. This translated into adjusted fourth quarter EPS of $0.25. This included a $0.03 benefit from a favorable tax item related to our Asian precision rolled strip business. On a reported basis, earnings per share was a loss of $0.23, reflecting a debt extinguishment charge and small restructuring adjustments. I'll provide some additional fourth quarter color, starting with our High Performance Materials & Components segment, or HPMC. Fourth quarter segment revenues increased by 5% versus the third quarter and by 41% versus the prior year. These gains illustrate the impact of the ongoing commercial aerospace recovery, which began in early 2021 with forgings and expanded to include materials in the fourth quarter. HPMC EBITDA was $61 million in Q4, which was significantly better than both prior periods. Robust year-over-year incremental margins of 60% were driven by improved product mix and higher volumes spread over our leaner cost structures. The segment also benefited from two additional items in the fourth quarter. First, a roughly $5 million benefit related to the U.S. government's Aviation Manufacturing Jobs Protection Program; and second, about $4 million…

Thanks, Don. We concluded 2021 with strong performance. It was a great quarter. It didn't just happen. We worked hard to get here with a great team executing fully. That gives us a running start as we begin 2022 with strong momentum. Last quarter, I told you we're pivoting to growth. Now we're firmly on that trajectory. We're seeing strong growth in our largest end market jet engines, along with several of our smaller markets. Our market shares have increased. We've got the tools to help offset inflation through pricing and productivity. And we're executing at a high level to fulfill our customer's needs on a timely basis. Our balance sheet is strong with ample cash and liquidity. This enables us to fund our strategic growth plans as part of a balanced capital allocation approach. Our markets are recovering well and we're positioned to win. We've got amazing capabilities and a winning team. And we can't wait to show you what we can achieve. Operator, we're ready for the first question.

Thank you. We will now begin the question-and-answer session. . And the first question will come from Richard Safran with Seaport Global. Please go ahead.

Thanks. Bob, Don, Scott, good morning. How are you?

Good morning, Rich.

An interesting quarter. The first question I'd like to ask is on the Q4 to Q1 earnings run rate and what that implies or says about '22. Now, Don, I may have missed this with your opening remarks. You got scrapping . But could you discuss more about the quarterly cadence for 2022 and why you're expecting earnings to be much lower in Q1 versus what we saw in Q4? Could you just go over the dynamics there?

Sure. Let me first give you some context around the $0.25 delivery in Q4. And then I'll kind of walk you through how we're thinking about Q1 and then the more fulsome 2022. So first, $0.25 in Q4, a fantastic outcome on all measures in our business, and we're very, very proud of that delivery. But as you look at our $0.25 in Q4, there are a couple of items that I highlighted in the earlier discussion that are certainly unique to Q4. They're kind of normal course in a business, but we wouldn't expect to repeat in Q1. And so as you start with $0.25 per share in Q4, one item that you'd want to pull out is the tax benefit related to our Asian precision rolled strip business. That was about $0.03 that we recorded in Q4. It's kind of a normal course thing that happens, but more typically done in the fourth quarter as we receive notification from the taxing authority. So that won't repeat in Q1. There's also the customer credits that I noted and that would represent also, coincidentally, another $0.03 per share. And that wouldn't be something that we would expect to repeat in Q1. So you take that $0.25 solid performance in Q4, back off $0.06, it gives you a better starting point to think about what Q1 would look like. And so that $0.19 compared to our range for Q1 of $0.18 to $0.26 and $0.22 midpoint highlights growth between Q4 rather than Q1. As I noted also in the earlier conversation, there are a couple of items to note as you think about Q1. First of all, we are expecting to see volume and price improvements from Q4 to Q1. So a good guide there. We do have some what I…

It is, of course. So last question here just quickly, I'd like to know if you -- could you expand on your opening remarks and talk broadly about what the end objective here is with your capital structure. I'm looking for what you expect to accomplish in '22, what levers you have, et cetera. So if you could just maybe talk to that a little bit?

Yes, I would love to. As you think about our strategy around capital allocation, what you should begin to see is a balanced approach. We're in a great position coming into 2022. We've got a very healthy balance sheet, almost $700 million of cash, well over $1 billion of liquidity. We put ourselves very purposely in a position where we have choices as to where we're going to allocate our capital. And really we do view it as a balanced approach. And what do I mean by that? Well, we want to continue to delever the balance sheet and our number one in delevering is attacking that pension obligation. We made phenomenal progress in that in 2021, and we're going to continue that glide path activity in 2022. So we'll do that delevering. Another key area for us is investing for growth. And so right now, our focus is primarily around organic growth with CapEx. If you think about our guidance around CapEx for 2022, we guided at $210 million to $225 million. And the way to think about that range of CapEx, Rich, is about 60% of that CapEx is really going to be pointed toward growth CapEx. Growth CapEx that will allow us to take advantage of the share gains that we've captured and participate in the ramp that's hitting our business right now. And so that's another key use. And then you're seeing another key use that's highlighted this quarter with the announcement of our stock repurchase program. Returning capital to shareholders is an important element to our strategy. And we believe that right now, stock repurchase, like we've announced, is a very efficient way to deliver that capital back to our investors. And so that's another key element of our strategy. So as you take a step back and you if you were describing our capital allocation strategy, what you'd want to remember is balanced and putting ourselves in a position where we're not choosing between one or another, but really able to execute on all of the opportunities, whether it's organic growth, delevering and return to capital. That's what our objectives are around capital allocation.

Thank you.

The next question will come from Seth Seifman with JPMorgan. Please go ahead.

Thanks very much and good morning. I was wondering if you could talk a little bit about where you are on production rates, especially on the two main narrowbody programs?

Good morning. So I think as we go into those kinds of questions, we always give you the starting answer which is we actually produced orders not necessarily to the build rates. But what I would say is that on the forging side, there's not a lot of inventory in the pipeline. We continue to see the demand going up at the same rate that the production rates are going up. So the trend line's going to intersect probably 12 months ahead, 9 to 12 months ahead of what the production is. So I would say our increase is tracking to the trend line of what the major narrowbody guys are talking about. I think there's some questions about supply chain disruption in the forgings path. And for the billet that we supply in the forgings, we're on track. We do get some of our billet on a directed by from other people. And that's been a little bit disrupted for various reasons discussed in the press. But I think our forgings business is probably the greatest bellwether for telling us where we are on the engine side and to the narrowbody business. So trend lines are lining up.

Okay. And then do you see -- I know you've talked about some of the share gains that you have and some of the investment you mentioned next year is going toward realizing those. Are there shorter term share gain opportunities that might be out there as the ramp proceeds, particularly on the narrowbody side?

Yes, I think the opportunities for us will come through performance with what we've historically called emergent demand. I think the pressure of the supply chain is going to be a relatively unprecedented ramp, because the demand is sitting there and the OEMs are increasing their builds to capture it as fast as they can. And obviously, most of the supply chains have adjusted themselves through the pandemic. So it's going to be exciting for the entire supply chain as we go forward. For us, we feel well positioned in terms of having said right from the start of the pandemic, we were going to remain recovery ready. We delayed a couple of investments during the pandemic. We talked this morning about the fourth iso press and that heat treating facility coming online in Wisconsin. We feel really good about that. That will give us a really preferential position I think for emergent demand. We will be ready when other people stumble. And so I think that gives us an opportunity for more of the emergent demand. As most of the major contracts were let going into the last ramp pre-pandemic, so I think supply base feels pretty comfortable that they have the contractual positions in place, but they're going to do whatever it takes to hit their ramp targets. So that's our opportunity to perform.

Great. Thanks. And then if I could follow up just with one last quick one. Within the guidance, Don, how are you treating the convert that comes to you later this year?

So in terms of the shares outstanding when you say how are we treating it?

Yes, exactly.

Yes. So, first, of course, we do assume it will convert. But when you think about the share count, at this point in the year, what I would assume is basic shares outstanding, about 127 million shares. And then we're still including, even though we had the share repurchase program in place, in our guidance, we're still assuming that all of the fully diluted shares are outstanding. And that's 152 million roughly of shares. So that's how I would think about it as you're modeling the year. If there are shares or when there are shares brought in under the share repurchase program, obviously, we'll share that with you guys each quarter so you understand what to adjust when it comes to your EPS calculations.

Got it. Thank you very much.

The next question will come from David Strauss with Barclays. Please go ahead.

Hi. Good morning. This is Josh Korn on for David. So regarding the guidance for next year, what are you assuming for oil and gas in 2022, given the much higher oil prices?

Yes. Good morning. This is Bob. In terms of oil and gas, I think we still see good demand in oil and gas. We talked about it in the commentary. There's two elements for us in oil and gas. There's the, we call it flow lines and umbilicals, but it's a smaller part of our business today than it used to be. And then we have the opportunity for some of the clad pipe products to go into more of the challenging oil and gas reserves. I wouldn't say it's going to be a huge uptick. And part of that is that I think the nickel products in the United States will be relatively tight, based on the uptick in demand in aerospace and defense. And we also see an uptick in India with what we call flue-gas desulfurization projects that go into coal-fired power plants to make their emissions much lower. That was slower in 2021. So we should see an uptick there. But that's more on the specialty energy side. So I would say modest continued growth, but it's going to be a tight market based on the nickel demand that's going on in the market.

Okay. Thank you. And then is there anything else left to spend within CapEx on the transition for the higher value-add product?

Yes, this is Don. So yes, in our 2022 CapEx, it includes additional spending to largely finish the transformation for SRP. And that's being executed on plan. Everything is unfolding as expected or maybe even a bit better. So yes, that's included there.

Okay. Thank you.

The next question will come from Phil Gibbs with KeyBanc Capital Markets. Please go ahead.

Hi. Good morning.

Hi, Phil.

I know we don't talk too much about it over the years, but things might be changing a bit, given some of the new business awards that you've had and gained over the last couple of years. How should we think about pricing, overall just pricing in terms of that kicking in, in 2022 and hitting the bottom line? Is that a bigger than normal driver this year?

I think you have to break it down between the two segments, Phil. Good morning, by the way.

Good morning.

And I think on high performance, we will see continued mix enrichment there, better product form, next generation alloys, next generation platforms. So we'll get product mix and the pricing that goes with that. You'll still continue to see that growth. I think on the AA&S side, probably there you'll see as we get into the higher value products, we're still going to get mix enrichment. The thing about that segment, about a third of it is transactional. So it really got some good upside in the tight market there. And almost all of our LTAs have significant material inflation pass through, and we're certainly doing that and then some in terms of the material pass through. So I would say still -- sometimes it's hard to differentiate price from product mix, because of the different alloys and programs we're participating in. But we still feel like there's good pricing opportunities due to the tightness in the market throughout 2022. It helps a lot that we're no longer in the stainless sheet business. And I think the metrics will become clearer now in 2022 that we're almost out of that business for sure.

Okay. So it does sound like there's some benefit in the guide from pricing and mix of shares, there should be --?

Yes, a little bit. I think that's right. With the nickel price strength that we've had, who knows where it's going to go for the balance of the year, but so far so good there.

And then, obviously, geopolitical risks are always apparent in global market like aerospace. And we've seen the Russian rhetoric swirl before. Is this time any different than in years past where you've got the potential to see emergent demand or fill the gap? And then I think do those conversations, on the other side, take kind of a bit of a cooling process maybe to some of those other periods, just because Boeing at the current time has enough inventory in the 787 channel?

Yes, good question. I'll take that one, Don, if it's all right with you. You reference kind of the Russian situation, and I would just start by saying we monitor it closely. It's hard to speculate as to what any solution would we learned in the downturn of the pandemic is move quickly. Now you actually had both positives and risks kind of as you walk through your question. And I would say that you're right with that. Probably the risk we manage most closely is what I'd call the nickel supply for non-rotating parts and products made in our Advanced Alloys & Solutions segment. It wouldn't affect really our HPMC segment because of how we source that material. And it's mostly on the nickel side. But in the AA&S segment, we always have the backdrop of scrap units and a few other things we can be working on. But that's the risk side we think. We'll watch that very closely and have some alternatives. And you're right. I think there's some upsides in terms of opportunities, probably on the titanium space and some of those other ones if something like that were to happen. So it's a balanced approach. We stay close to it. We assess it and we control what we can and adapt. And I think the organization's proven they can do that over the last two years. But it's something we're watching very closely.

And then last question just for Don. In terms of your expectations for 2022, how are you thinking about the corporate effective tax rate? I know you gave the cash piece, but the corporate effective tax rate within that EPS number? And then also what the raw material plus or minus was after a pretty strong year this year?

Yes, the way to think about the corporate tax rate is it's going to be extremely low. I think I shared that we expect cash taxes to be in the $15 million to $20 million range, and we're fully reserved on the Federal side for U.S. purposes. So I really expect an extremely low effective tax rate for the overall organization. So I think there's -- just before we leave the theme of guidance on how to think about some of the activities that are going on in the market geopolitically, it might be helpful too to just touch base a little bit on inflation and how we're managing inflation and the questions around price. I think one thing that our team has done an extremely good job at is as the supply chain volatility has hit the world, our team has done a terrific job managing all those dynamics. And one way that we've been successful in doing that is being very proactive around offsetting inflation through price, also through efficiencies where we believe we have a core competency in improving our efficiencies from period-to-period. But I think it's an important thing for us to highlight. The organization is very focused on monitoring what's happening with input costs and quickly reacting to those dynamics, making sure that we're getting the right price adjustments to offset. So thanks for letting me add that.

Thanks, Don. I appreciate it.

The next question will come from Gautam Khanna with Cowen. Please go ahead.

Hi. Good morning, guys.

Good morning.

Good morning.

I have two questions. First, you heard Raytheon and Boeing point out that forgings and castings will be or is a pinch point in the supply chain. And I wondered, how much is commented that it's not them? I was wondering, are you guys seeing constraints to your output in the forgings and casting space? Or do you think those comments of some of the prime contractors relate to other competitors or perhaps they're just speculating on what might happen? And then have a follow up.

All right, good question, Gautam. I would say casting is a separate issue and we're not in that product line anymore. So we don't see too much of that activity luckily. On the forging side, I would say -- our perspective, I’d start off with a real clear, definitive statement. It's not us either. And part of the advantage of the ATI supply chain is we're vertically integrated back to billet. Depending on the product, depending on the application, 70% of what we do comes from our own operations. So we're close coupled and we certainly see the advantage from a supply chain signal and response. But the other 30% is billet that's on a directed buy that comes to us. And yes, I would say one of our competitors is pretty open about a press that they're working to supply. So we're seeing little disruption from that. And then I think any time somebody is restarting a powder billet capacity, you can run into bumps, right. So we are seeing some of those kinds of challenges in the supply chain, not totally unexpected, but things that we're working hard with our customers to overcome.

Okay. And then just to follow up on that, the Special Metals Corp. has got that strike on five months now, like you mentioned the Reading press at Carpenter out of commission for a little bit. Does this confer or are you seeing emergent demand right now for nickel billet or how might that actually change share or does it?

Yes, good question. So simple answer to your question is yes, we're seeing emergent opportunities due to the supply chain disruptions of others. I think there are opportunities as we have been through this ourselves, but we're obviously in a great position, trusted supplier, have the relationships. Part of our strategy shift as part of our transformation is to move more to long-term agreements. So I think as we see this disruption, especially with our transformation of the sheet business, the Specialty Rolled Products business with our new capabilities; coupling, melt to hot rolling to finishing, and the wider widths and tighter gauges, there's a lot of pull for that demand. So we feel like there's emergent demand that we'll be able to sustain longer term in our Specially Rolled Products business in the AA&S segment. So yes, we're seeing it and we're trying to take advantage of it.

Last one, if I might, Bob. You've told us to tune in to the Investor Day, but in the past, you guys have mentioned 600 million plus of EBITDA as being achievable. Anything changed on that view?

I’ll go first and say no. But then I'll ask Don to add color.

I would add no. All joking aside, we're on track. And you can see that in our -- hopefully you can see that in our 2021 performance. And you’re right. I have talked a number of times about how to think about the long-term profitability of our business relative to where we were at in 2019. And what I would say is we are absolutely on track with the color that I've shared with you guys in the past. When it comes to February 17, we're going to share more information, trying to help you understand a few things about how do we think about top line growth over the extended period of time? How do we think about margins over the extended period of time? And then really importantly, we also want to talk a bit about cash generation over the extended period of time. And metrics like cash, cash conversion yields and those kinds of things, because they're an important part of understanding the value opportunity and potential in our business. So we're going to spend some time with the attendees on all those topics and more.

Great. Looking forward to it, guys.

All right. Thanks, Gautam.

The next question will come from Josh Sullivan with The Benchmark Company. Please go ahead.

Hi. Good morning.

Good morning, Josh.

So I understand that the S&P rate due to Omicron in Q1, but what about the incremental labor needs throughout the year and then to hit the higher production levels? How heavy a lift is that on headcount? Do you see any tight areas there, especially as you're talking about capturing this emergent demand, just curious about what you're seeing in those specialized labor markets you guys access?

Right. So it's very regional. And the issue we're dealing with the absenteeism has been really short term. I appreciate you asking about it, because it's been a daily fight to make sure that who's going to come in and what kind of crew you have? And it’s the opportunity for me to say, hey man, I really respect the challenge our first line supervisors are going through, but they're up to the challenge and they're working through it. And we are seeing very much a commitment to operating safely, but also it’s regional, right? So the thing about our company, we think about the Carolinas, we think about Wisconsin, we think about Pennsylvania, and we think about Oregon, right? So Omicron kind of started in the East and went West, and we're starting to see that impact decline. Now you asked the question about labor. Our investments over the last few years have brought a tremendous amount of automation into our operation. Probably as a guide, over the course of 2022, we'll hire between 400 and 450 operating people against a base of 6,000 to 6,500, give or take, depending on how you count. So 15% kind of increase. And again, it's -- the short-term impact of Omicron was in reliable training progress. So we're kind of working through that now. But as it recedes, we should be back on track. But again, it's not a huge issue. I'd also say aerospace and defense jobs are great jobs, especially where we are in the cycle and people that we're hiring see that. It's not quite like retail or distribution or warehousing. These are jobs that people really covet. So I think we're recruiting from a good base. And obviously, we're committed to remaining globally competitive. So there's always that constructive tension. And certainly, any issues that we deal with, we should be able to offset with pricing as we think about inflationary trends there. I hope that helped, Josh.

Yes, that's all great. And then just on the fourth isothermal forging you guys have coming online, how should we think about the utilization filling up there versus what was built on the organic demand, what was originally designed versus this emergent demand that you're thinking about? Maybe just curious how you're thinking that's going to come together?

Yes. So it's a great complex combination of the isothermal press and then some heat treating capacity that came with it. Every good operating leader always wants to use the new stuff fully. And they want to use it fully, because it's more automated, more consistent, higher productivity, not that we had a quality issue, but the more consistency to it, more reliable. So what you'll see is on the new asset, it should be fully utilized. And then what normally happens is the oldest press tends to be either we invest in maintenance to make sure it's recovery ready for the peak that's coming, or we optimize our product mix across those kind of assets to make sure that each one is running the most optimal product mix. So I expect the utilization of that particular unit to be pretty good pretty fast. That's why they were committed to getting all the necessary customer qualifications done during this period of reduced demand, we'll just call it. So we feel pretty good, but I would say be highly utilized and then our less efficient press will probably get less utilization.

And then just one last time just on the timing of the naval nuclear material, how should we think of that cycle through '22 and '23?

The naval nuclear cycle through 2022-2023, I think you'll see continued growth. There’s certainly some positive poll. The Australians are thinking, they're doing their thing with the British and the Americans on more submarines. I think that will benefit us. And we're starting to see the poll for that. So I think you'll see a continued increase through 2022 into 2023. The cycle is pretty long here. And the commitments should be multiple years past that. But I'd say when Don was kind of talking about the growth through the year, the aerospace increase is one of those, the defense aside with naval nuclear leading the way as the second one that should be a real positive upward lift.

The next question will come from Paretosh Misra with Berenberg Capital Markets. Please go ahead.

Hi. Good morning, guys. Thanks for taking my question. So metal prices have been quite strong. Is that a risk in the second half of this year or next year that that could be a revenue headwind, even though I realize that you pass those through to your customers?

I think it's hard to predict nickel prices, Paretosh. I think I would say one of the things we're doing that we're focused on is improving our inventory intensity or reducing the use of inventory as a percentage of our sales. We had over 700 basis point reduction in the intensity. Probably the biggest single up or down risk we face today and that is working process inventory. So our goal is to have as little as we need for WIP that will help us. I think the transformation that we're doing will help accelerate that, because we got less footprints and less travel between locations, and will help us accelerate the reduction. But it is possible. I would say we're doing everything we can do to mitigate it going forward. And getting out of the stainless sheet business actually takes away the greatest single risk we've had historically in that area. So I think we feel like we're moving in the right direction there.

Fair enough. And then how should we think about the incremental margins in 2022, given some headcount increase through the year and some of the moving parts?

Sure. This is Don. I'll take that question. First, we had a fantastic experience around our incremental margins in second half of 2021. And as you think about the incremental margins going forward, you're pointing out potential headwinds to it. There's also potential tailwinds that can come up from time to time. I think what you really want to do is you want to stick with the guidance that we've given in the past, which is incremental margins through this up cycle in the 30% to 40% range. We're going to have some quarters like this quarter where they were extremely strong, and we'll have other quarters it might be a little bit short of that goal. But long term, I would really stick with that 30% to 40% incremental.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Scott Minder for any closing remarks. Please go ahead.

Thanks. As Bob and Don mentioned, we plan to hold a virtual Investor Day on February 17, where we'll expand on our business strategy and provide long-term financial targets. More information on how to attend the event can be found on our Web site, atimetals.com. Thanks again for joining us today. This concludes our fourth quarter 2021 earnings call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.